A field that is closely related to behavioral economics and aiding its development is Neuroeconomics. Neuroeconomics uses the insights and methodologies of neuroscience, the study of the brain, in order to deepen our understanding of economics. Neuroscience has both been able to augment some of the traditional assumptions of classical economics (termed the “incremental approach”) and to force economics to completely rethink classical economic constructs (termed the “radical approach”). Classical economics evolved based on a system of revealed preferences — the idea that people’s preferences can indicated correctly through their actions, such as through their purchases. Now that a neuroscience technique allows measurement of actual thoughts and feelings, the link between feelings and actions is being broken down.
Understanding The Brain.
What neuroscience doing, perhaps most importantly, is illuminating the difference between controlled and automatic responses and between the affective and cognitive systems. Classical economics mostly deals with controlled responses and the cognitive system. It presumes that people always can and do fully take the time to weigh all of their options, think of all of the ramifications, and pick the option that maximizes their utility. Some responses, however, are automatic. People have little control over these processes and even very little introspective access. Therefore, the usual utility-maximizing behavior cannot apply. Furthermore, some responses, whether or not there are automatic, are drive by the affective system. This includes not only emotions, but also drives, such as arousal, pain, and craving.
What tools does Neuroeconomics employ? Firstly, Neuroeconomics employs neural imaging techniques, such as MRIs, PET scans, and EEGs. But the field has a number of other tools at its disposal, including single-neuron imaging (used only on animals, thus far), electrical brain stimulation (EBS), the examination of brain damage and its effect on humans, Transcranial magnetic stimulation (TMS), diffusion tensor imaging (DTI) and the monitoring of physiological indicators.
The use of neuroscience techniques to inform economics is Neuroeconomics. So what have these techniques told economists? Firstly, it challenges many of the basic constructs we now use, such as risk aversion and time preferences. For instance, classical economics assumes that people have consistent discount rates across different activities. However, neuroscience shows us that different parts of the brain are used when contemplating or doing different activities. Thus, the discounting involved overeating may be completely different than the discounting involved in properly storing your shoes. Secondly, brain scans suggest that people react similarly to the gain or loss of money as do the gain or loss of food. This implies that money itself has utility, as opposed to being an indirect measure of utility as something than can be used to obtain other things. Thirdly, the distinction in the brain between pleasure and motivation system shows that people do not always pursue the most that is that they want the most, which is a basic assumption of classical economic theory. This is just a sampling of the findings of neuroeconomics.
The implications of neuroeconomics are staggering. With the brain more accessible than ever before, assumptions that were made before economics could know how people thought have to be rethought. Though it is too early to tell exactly how and if economics will integrate this field, it is certainly promising to change the way many of us think.
The CEO Game.
September 26th, 2009 at 1:23 pm
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